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Washington is spectacular this time of year. While the cherry blossoms have gone, the subtropical heat hasn't yet arrived. Tourists likely will flood into the D.C. area for the Memorial Day weekend to tour the nation's capital and to honor those who have nobly served their country in the military.

Washington also is the scene of spectacles of another sort, as demonstrated last week when executives of
AppleAAPL -0.8743973196044782%Apple Inc.U.S.: NasdaqUSD121.3
-1.07-0.8743973196044782%
/Date(1438376400350-0500)/
Volume (Delayed 15m)
:
41225145AFTER HOURSUSD121.45
0.150.1236603462489695%
Volume (Delayed 15m)
:
1659808
P/E Ratio
14.006928406466512Market Cap
691740216377.936
Dividend Yield
1.7147568013190437% Rev. per Employee
2409500More quote details and news »AAPLinYour ValueYour ChangeShort position
(ticker: AAPL) had to explain to a Senate panel why the company utilized arcane aspects of the tax law to minimize its tax bill. What arguably has become the most successful American corporation of this generation is accused of doing things a normal person would hardly call kosher—even if they are perfectly legal—such as arranging its business to generate profits in countries where profits are lightly taxed or even beyond any constituency.

But we're not talking about normal people; we're talking about tax lawyers, lobbyists, and members of Congress, who contrive a tax code so complicated as to ensure their own future employment. Clearly, a simple, straightforward tax system would obviate the need to seek favors or to exploit its features, which in turn would dry up an important source of campaign contributions for those who make the laws.

So, it was the very definition of chutzpah for Sen. Carl Levin's Permanent Subcommittee on Investigations to demand to know why Apple had used, to its maximum advantage, the law Congress had written. At least the Michigan Democrat kept a relatively civil tongue during the inquiry, unlike his upbraiding of
Goldman SachsGS -1.027992277992278%Goldman Sachs Group Inc.U.S.: NYSEUSD205.07
-2.13-1.027992277992278%
/Date(1438376522377-0500)/
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:
1597417AFTER HOURSUSD205.39
0.320.15604427756375872%
Volume (Delayed 15m)
:
46612
P/E Ratio
12.155898043864848Market Cap
88593522481.8066
Dividend Yield
1.2678597552055395% Rev. per Employee
1156880More quote details and news »GSinYour ValueYour ChangeShort position
(GS) during a 2010 hearing in which he quoted from an e-mail regarding one of the firm's bubble-era mortgage-backed-securities offerings and described it in scatological terms nearly a dozen times.

Obviously, reform of the tax code to do away with abuses, whether real or perceived, could be enacted by Congress if it chose, but that would be hard work, as opposed to political theater. And D.C. has more play-acting these days than Broadway, amid the fallout over the Benghazi tragedy, secret subpoenas for Associated Press reporters' material, and the top Beltway brouhaha: the investigation into the Internal Revenue Service's targeting of conservative groups seeking tax-exempt status. Here, at least, we've found a villain we can all agree on. And the reason for IRS agents concentrating their ire on groups with Tea Party or Liberty in their names just might have something to do with the desire by such groups to curb the power of the government—especially its power to tax, which as former Supreme Court Chief Justice John Marshall wrote, is the power to destroy.

The investigations into the IRS abuses will drag on through the summer, as Washington Editor Jim McTague writes in his D.C. Current column, which leaves less time for the people's business. Less pressing matters, such as raising the debt ceiling, which was restored with few folks noticing May 19 after having been suspended—and has been reached again, necessitating the now-usual "extraordinary" fiscal maneuvers to go over—are on the back burner. A one-time windfall payment from
Fannie Mae
(FNMA) for $59.4 billion could tide Uncle Sam over the summer, which would be just another example of finagling in D.C., as Jim amply described a few weeks ago ("Fannie, Freddie, Zombie," May 13).

LUCKILY FOR THE STOCK market, Washington scandals typically don't affect it much. Kim Wallace of Renaissance MacroResearch constructed one of those business-school quadrant charts plotting scandals of past decades against their impact on governance and the public's reaction. Those placing in the top quadrant on both criteria were Watergate, the failed Iran hostage attempt at the tail end of Jimmy Carter's term, the Iran-Contra Affair in Ronald Reagan's second term, and the Clinton-Lewinsky flap.

From June 3 to Aug. 9, 1974, while Watergate hearings were broadcast through President Nixon's resignation, the Standard & Poor's 500 fell 13.84%. Of course, that was in the end stages of a brutal bear market resulting from a steep recession, accompanied by a surge of inflation from skyrocketing oil prices and unprecedented high interest rates. The market also was battered in 1980 by the first of two back-to-back recessions with wildly swinging interest rates. In contrast, the bull markets of the 1980s and 1990s scarcely flinched during their scandals.

And until Wednesday's swoon, the S&P 500 and other market measures had been hitting new highs. "Perceptions of economic and market fundamentals are overwhelming Washington developments," Wallace writes.

True enough, in the short term. But how these scandals affect the odds of substantive, long-term budget reform remains to be seen. The likelihood of a so-called Grand Bargain between a lame-duck president and an opposition party—which only months ago had been in total defeat and disarray and now sees a chance to gain in the 2014 mid-term elections—hasn't been enhanced.

THAT GLOBAL MARKETS were driven by forces other than the events that dominated the attention of the denizens of D.C. could hardly be more apparent than after last week's action.

Markets of all stripes—U.S. stocks and bonds, Japanese stocks and bonds, European bourses and bonds, currencies, and commodities—hit a huge air pocket Wednesday and Thursday in the wake of a string of alarming events. First was Federal Reserve Chairman Ben Bernanke's seemingly equivocal message about monetary policy. Then came a 7% swoon in Tokyo's previously soaring Nikkei.

The ascent of equities around the globe, from Wall Street to Tokyo and beyond, largely has been a result of central-bank actions. And that has served stock bulls well, with the S&P 500 up 17% year-to-date, as of Tuesday, and the Nikkei 225 up 48%. Last week brought a reality check as to whether central-bank printing presses will, or can, continue to inflate asset prices.

Bernanke recited before Congress on Wednesday words from the current Fed script—that the central bank will maintain its policy of buying Treasury and agency mortgage securities at a $1 trillion annual clip while unemployment remains above its target of 6.5%, which is still well below the current jobless rate of 7.5%. But in questions from the Joint Economic Committee of Congress, he allowed that the Federal Open Market Committee could mull some reduction in the pace of bond purchases in three or four meetings, which would be late in the year. Just the suggestion that this succor could ever be reduced, let alone withdrawn, was enough to turn a market gain to a loss that day.

Then came the swoon in Asia Thursday. Japan's stock market, up fractionally early on, went into free fall after data showed that China's industrial output was much worse than expected, and indeed, contracting. Call it a case of disoriented markets. Equity markets in both Tokyo and New York tumbled when yields on 10-year bonds in their respective markets rose to psychologically important round numbers—1% for Japanese government bonds, 2% for Treasuries. Coincidence, perhaps.

The rise in Japan's bond yields is contrary to what everybody expected from "Abenomics," named for the current prime minister, Shinzo Abe, who was swept into power last year on a program of aggressive reflation through expansion of the Bank of Japan's balance sheet, with the salutary side effect of lowering the overvalued yen. Since its low late last year, the yen has fallen from under 80 to the dollar to over 100, a massive move in so short a span.

But, writes Nomura Research Institute chief economist Richard Koo, the plan doesn't seem to be working. If the BOJ's intent was to reverse deflation and create inflation, bond yields eventually would be expected to rise from their depressed levels—a low of 0.58% for the 10-year JGB—to 1% but they did so more rapidly than expected before slipping back. Koo writes that banks are inhibited from lending at such low interest rates if those rates were expected to rise. And so Japanese bank stocks and real-estate investment trusts tumbled in the wake of the bond market's slide.

Back in the States, REITs and other interest-sensitive stocks also were under pressure, with the Treasury market selling off and lifting the 10-year yield decisively above 2%. The bulls' mantra is that higher bond yields reflect a better economy and thus should pose no impediment to higher stock prices.

Gavan Nolan, head of credit research at Markit, a major derivatives data provider, wonders if markets are becoming fretful about central banks' apparent willingness to follow the advice of Ralph Waldo Emerson: "Don't be too timid and squeamish about your actions. All life is an experiment." Which is all well and good for a personal philosophy, but less so for economic policy.

The unprecedented expansion of central-bank liquidity, both to spur economies and accommodate massive fiscal deficits, constitutes an experiment to prove an untested hypothesis. Not all experiments succeed. Some seem promising at the outset, but negative side effects can emerge from the novel therapy.